Wednesday, August 17, 2011

Sri Lanka SEC permits margin loans by brokers

Aug 16, 2011 (LBO) - Sri Lanka stock brokers will be allowed to give margin facilities to clients using their net liquid asset, the Securities and Exchange Commission said following requests by the industry.

The SEC clamped down on broker credit as a bubble developed in the market last year and brokers also borrowed from banks to give credit to retail investors.

Speculative retail buying became the mainstay of Colombo's market after foreign investors started to sell out of overvalued stocks.

The SEC told brokers to stop giving new credit amid fears that brokering firms did not have online tracking system to monitor client credit.

The SEC has asked for monthly returns.

The relaxation is an expansion of the business activities of brokers allowing them to move beyond fee based brokerage and engage in fund based activity like a banks.

Such activity requires tight monitoring, credit evaluation and ability to enforce margin calls.

The SEC statement did not specify the margin a client can be given, though protection to the brokering system was given by limiting total credit to their net liquid capital.

The full SEC statement is reproduced below

The Securities and Exchange Commission of Sri Lanka (SEC) at a Special Commission Meeting held on 15th August 2011 reviewed the restriction imposed on Stock Brokers in extending credit to investors and has decided to relax the said restriction subject to certain prudential requirements being met by the Licensed Stock Brokers, in order to facilitate retail investors to have access to credit by such Licensed Stock Brokers.
The SEC took cognizance of the improving stability in the capital market together with the concerns expressed by the Colombo Stock Brokers Association and retail investors and decided to relax the said restriction subject to prudential requirements as mentioned below.

Therefore, the SEC hereby directs the Colombo Stock Exchange (CSE) as follows:

1. To permit Licensed Stock Brokers to extend credit to investors over T+3 days based on the computation of Liquid Assets less Obligations, maintaining a leverage at zero level as set out in Annexure 1 hereto;

1. To amend the relevant provisions of the Member Regulations of the CSE in such manner to be consistent with this Directive;

1. To mandate Licensed Stock Brokers to reconcile daily positions taken against the Liquid Assets by such Licensed Stock Broker and to submit on a monthly basis a declaration to the SEC and CSE confirming the position of Liquid Assets less Obligations as it stands at the end of each month. The declaration to be submitted within 2 market days after the end of each month;

1. To disseminate this Directive to all Members of the CSE.
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